The following discussions should be read together with the unaudited consolidated financial statements and the notes thereto included in this report and with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K.

Forward-Looking Statements

Certain statements in this Form 10-Q include statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as "forward-looking statements." These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties, and other factors that could cause our actual results to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "project," "forecast," "plan," "may," "will," "should," "expect" and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:

• Our future operating results;

• Our business prospects and the prospects of our portfolio companies and their ability to achieve their objectives;

• Our ability to make investments consistent with our investment objective;

• The impact of investments that we expect to make;

• Our contractual arrangements and relationships with third parties;

• The dependence of our future success on the general economy and its impact on the energy industry;

• Our expected debt and equity financings and investments;

• The adequacy of our cash resources and working capital; and

• The timing of cash flows, if any, from the operations of our portfolio companies.

We undertake no obligation to update or revise any forward-looking statements made herein.

Overview

Kayne Anderson Energy Development Company ("we," "us," and "our") is a non-diversified, closed-end management investment company organized under the laws of the State of Maryland that has elected to be treated as a "business development company" ("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). Prior to December 1, 2007, we elected to be treated as a regulated investment company ("RIC") for tax purposes under the Internal Revenue Code of 1986, as amended (the "Code").

On January 22, 2008, we announced that we no longer intend to be treated as a RIC under the Code. As a result of this change, we will be taxed as a corporation for our fiscal year ended November 30, 2008 and for future fiscal years, paying federal and applicable state corporate taxes on our taxable income and capital gains. We will continue to be regulated as a BDC under the 1940 Act.

Our operations will continue to be externally managed and advised by our investment adviser, KA Fund Advisors, LLC ("KAFA"), pursuant to an investment management agreement. We invest primarily in energy companies that are not publicly traded ("private"). Our primary investment objective is to generate both current income and capital appreciation primarily through debt and equity investments. We will seek to achieve this objective by investing at least 80% of our net assets together with the proceeds of any borrowings (our "total assets") in securities of companies that derive the majority of their revenue from activities in the energy industry ("Energy Companies"), including: (a) Midstream Energy Companies, which are businesses that operate assets used to gather, transport, process, treat, terminal and store natural gas, natural gas liquids, propane, crude oil or

refined petroleum products; (b) Upstream Energy Companies, which are businesses engaged in the exploration, extraction and production of natural resources, including natural gas, natural gas liquids and crude oil, from onshore and offshore geological reservoirs; and (c) Other Energy Companies, which are businesses engaged in owning, leasing, managing, producing, processing and sale of coal and coal reserves; the marine transportation of crude oil, refined petroleum products, liquefied natural gas, as well as other energy-related natural resources using tank vessels and bulk carriers; and refining, marketing and distributing refined energy products, such as motor gasoline and propane to retail customers and industrial end-users.

A key focus area for our investments in the energy industry will continue to be equity and debt investments in Midstream Energy Companies structured as limited partnerships. We also expect to evaluate equity and debt investments in Other Energy Companies, and debt investments in Upstream Energy Companies. We refer to these investments as our "Targeted Investments." Under current market conditions, we expect that our Targeted Investments will generally range in size from $10 million to $60 million, although a few investments may be in excess of this range.

We seek to enhance our total returns through the use of leverage, which may include the issuance of shares of preferred stock, commercial paper or notes and other borrowings, including borrowings under our credit facilities. We currently expect to use leverage in an aggregate amount equal to 30% of our total assets, which includes assets obtained through such leverage.

Current Business Market and Climate

Since the end of our fiscal third quarter, the global credit crisis has intensified. During this period, the market prices for publicly traded MLP securities have declined substantially. Likewise, because our private MLP securities are valued, in part, based on public MLP values, we expect that the value of our private MLP securities has also declined.

Portfolio and Investment Activity

Our investments as of August 31, 2008 were comprised of equity securities of $261.5 million and fixed income investments of $38.3 million.

As outlined in the table below, we have reconfigured our portfolio of investments during fiscal 2008 - increasing our investments in private MLPs and decreasing our holdings in fixed income investments. This change is consistent with our stated strategy when we announced our election to no longer be treated as a RIC.

                                              Percent of Long-Term Investments
                                             August 31,              November 30,
                                                2008                     2007

  Publicly Traded MLP and MLP Affiliate               25.6 %                   28.4 %
  Private MLP                                         61.6                     42.1
  Other Private Equity                                 0.0                      1.6
  Fixed Income Investments                            12.8                     27.9

                                                     100.0 %                  100.0 %

During the nine months ended August 31, 2008, we have converted certain holdings in Millennium Midstream Partners, LP, VantaCore Partners LP and Direct Fuels Partners, L.P. into common units. Each of these conversions did not change the underlying economics of our investment but was done subsequent to our election to become a taxable corporation in an effort to simplify our holdings in such investments.

On August 4, 2008, $7.5 million of our senior secured loan fixed income investment was redeemed at 103%, and we used these proceeds along with $12.3 million of cash on hand to purchase additional VantaCore common units totaling $20.0 million.

Certain of our fixed income securities accrue interest at variable rates determined on a basis of a benchmark, such as LIBOR, or the prime rate, with stated maturities at origination that typically range from 5 to 10 years. Other

fixed income investments accrue interest at fixed rates. As of August 31, 2008, 78%, or $29.8 million, of our interest-bearing portfolio is floating rate debt and 22%, or $8.5 million, is fixed rate debt.

Our Top Ten Portfolio Investments as of August 31, 2008

Listed below are our top ten portfolio investments as of August 31, 2008,
represented as a percentage of our total assets(1).


                                                                                                       Percent
                                              Public/                                Amount           of Total
            Investment                        Private           Sector           ($ in millions)       Assets

    1.      Millennium Midstream Partners,    Private        Midstream -        $            60.1          19.6 %
            LP(2)                                             Specialty
                                                            Processing and
                                                             Distribution
    2.      Direct Fuels Partners, L.P.(3)    Private      Midstream - Gas                   52.0          17.0
                                                              Gathering
    3.      International Resource            Private            Coal                        36.0          11.7
            Partners LP(4)
    4.      VantaCore Partners LP(5)          Private       Aggregates and                   30.6          10.0
                                                                Mining
    5.      ProPetro Services, Inc.(6)        Private     Oilfield Services                  20.0           6.5
    6.      Enterprise Products Partners      Public          Midstream                       7.5           2.4
            L.P.
    7.      Quest Midstream Partners,         Private         Midstream                       6.1           2.0
            L.P.(7)
    8.      ONEOK Partners, L.P.              Public          Midstream                       5.5           1.8
    9.      Plains All American Pipeline,     Public          Midstream                       4.9           1.6
            L.P.
   10.      Dresser, Inc.                     Private     Oilfield Services                   4.8           1.6

            TOTAL                                                               $           227.5          74.2 %

(1) Total assets were $306.6 million as of August 31, 2008.

(2) Our investment in Millennium Midstream Partners, LP includes 2,375,000 Class A common units, which represents a 39% limited partnership interest, and 212 incentive distribution rights (21% of total outstanding incentive distribution rights).

(3) Our investment in Direct Fuels Partners, L.P. includes 2,500,000 Class A common units, which represents a 38% limited partnership interest, and 200 incentive distribution rights (20% of total outstanding incentive distribution rights).

(4) Our investment in International Resource Partners LP includes 1,500,000 Class A common units, which represents a 28% limited partnership interest and 10 incentive distribution rights (10% of total outstanding incentive distribution rights).

(5) Our investment in VantaCore Partners LP includes 1,464,673 common units ($30.6 million), which represents a 39% limited partnership interest, and 1,823 incentive distribution rights (18% of total outstanding incentive distribution rights).

(6) Our investment in ProPetro Services, Inc. includes a senior secured second lien term loan ($20.0 million) and 2,904,620 warrants ($0).

(7) Our investment in Quest Midstream Partners, L.P. includes 350,000 common units, which represents a 2.5% limited partnership interest.

Results of Operations - For the three and nine months ended August 31, 2008

Set forth below is an explanation of our results of operations for the three and nine months ended August 31, 2008, respectively.

Investment Income. Investment income totaled $1.9 million and $5.7 million and consisted primarily of interest income on our short-term investments in fixed income investments and repurchase agreements. We earned $5.0 million and $14.3 million of cash dividends and distributions, of which $3.8 million and $12.8 million was treated as a return of capital during the period. During the period, we lowered our estimate of return of capital from

97% to 90% based on 2007 K-1 data received from the MLPs. Consistent with second quarter 2008, we elected to no longer accrue interest on our ProPetro investment.

Operating Expenses. Total operating expenses totaled $2.9 million and $10.2 million, including $1.3 million and $4.0 million of base investment management fees; $1.0 million and $3.5 million for interest expense and $0.6 million and $2.7 million for other operating expenses. During the second quarter, we also incurred $0.8 million of bad debt expense related to interest accrued during the first quarter of 2008 on our fixed income investment in ProPetro. For the nine months ended, interest expense included the write-off of capitalized debt issuance costs of $0.3 million related to the termination of the Treasury Facility. Base investment management fees were equal to an annual rate of 1.75% of average total assets. We did not pay a management fee or any incentive fee with respect to any investments made under the Treasury Facility, which we terminated effective January 31, 2008.

Net Investment Loss. Our net investment loss totaled $0.6 million and $2.8 million, which consisted of $1.9 million and $5.7 million of investment income. This investment income was reduced by total operating expenses of $2.9 million and $10.2 million and offset by deferred income tax benefits of $0.4 million and $1.7 million.

Net Realized Losses. We had net realized losses from our investments of $4.0 million and $1.8 million, which was net of deferred tax benefit of $2.4 million and $1.1 million. Our realized losses of $5.0 million on the sale of equity and debt securities of SemGroup were the driver of the realized loss during the third quarter.

Net Change in Unrealized Gains (Losses). We had net unrealized losses from our investments of $4.4 million and $5.0 million, both of which are net of tax. For the nine months ended, unrealized gains on our private MLPs were offset by unrealized losses on our public MLP portfolio. For the three months ended, the net unrealized losses consisted of $7.0 million of losses from our investments and a net deferred tax benefit of $2.6 million. For the nine months ended, the net unrealized losses consisted of $1.9 million of losses from our investments; a net deferred tax benefit of $0.7 million and a deferred tax expense of $3.8 million relating to our conversion from a RIC to a taxable corporation, effective December 1, 2007.

Net Decrease in Net Assets Resulting from Operations. For the three months ended, our net decrease in net assets resulting from operations for the period was $9.0 million. This increase is composed of the net unrealized losses of $4.4 million; net realized losses of $4.0 million and net investment losses of $0.6 million as noted above.

For the nine months ended, our net decrease in net assets resulting from operations for the period was $9.6 million. This decrease is composed of the net unrealized losses of $5.0 million, net realized losses of $1.8 million and net investment losses of $2.8 million as noted above.

Results of Operations - For the three and nine months ended August 31, 2007

Set forth below is an explanation of our results of operations for the three and nine months ended August 31, 2007, respectively.

Investment Income. Investment income totaled $2.8 million and $8.6 million and consisted primarily of interest income on our short-term investments in repurchase agreements and fixed income investments. We earned $2.4 million and $5.1 million of cash dividends and distributions, substantially all of which were treated as a return of capital during the period.

Operating Expenses. Total operating expenses totaled $2.0 million and $4.9 million, including $0.9 million and $2.4 million of base and incentive investment management fees (net of fee waivers) and $0.3 million and $0.7 million for professional fees. Base investment management fees (net of fee waivers) were equal to an annual rate of 1.25% of average total assets.

Net Investment Income. Our net investment income totaled $1.0 million and $4.0 million, which consisted of $2.8 million and $8.6 million of investment income, primarily from our interest income on short-term investments in repurchase agreements. Investment income was reduced by total operating expenses totaling $2.0 million and $4.9 million and increased by deferred income tax benefits of $0.2 million and $0.3 million.

Net Realized Gains. We had net realized gains from our investments of $0.4 million and $3.5 million.

Net Change in Unrealized Gains (Losses). We had net unrealized losses from our investments of $6.1 million and net unrealized gains from our investments of $6.4 million, which are net of deferred tax expense of $0.5 million and $0.9 million.

Net Increase (Decrease) in Net Assets Resulting from Operations. Our net decrease in net assets resulting from operations was $4.7 million , and our net increase in net assets resulting from operations was $14.0 million. These changes are composed primarily of the change in net unrealized losses of $6.1 million and net unrealized gains of $6.4 million, net investment income of $1.0 million and $4.0 million, and net realized gains of $0.4 million and $3.5 million as noted above.

Liquidity and Capital Resources

As of August 31, 2008, we had approximately $5.1 million invested in short-term repurchase agreements. As of October 7, 2008, we had approximately $2.7 million in repurchase agreements. Our repurchase agreements are collateralized by U.S. Treasury Notes, and our counterparty is J.P. Morgan Securities Inc.

As of August 31, 2008, we had $77.5 million of borrowings (with $22.5 million remaining available) under our Investment Facility at a weighted average interest rate of 3.72%. As of October 7, 2008, we had $37.0 million of borrowings (with $63.0 million remaining available) under our Investment Facility at a weighted average interest rate of 3.74%.

On June 4, 2007, we established two new syndicated credit facilities - the Senior Secured Revolving Credit Facility (the "Investment Facility") and the Treasury Secured Revolving Credit Facility (the "Treasury Facility") - totaling $200 million with SunTrust Capital Markets, Inc. and Citigroup Capital Markets as co-arrangers. The Investment Facility has initial availability of up to $100 million with the ability to increase credit available under the Investment Facility to an amount not to exceed $250 million by obtaining additional commitments from existing lenders or new lenders. The Investment Facility has a three year term and bears interest, at our option, at either (i) LIBOR plus 125 basis points or (ii) the prime rate plus 25 basis points.

On January 31, 2008, we terminated the Treasury Facility. All amounts of principal and interest were paid in full, and we sold $14.4 million of U.S. Treasury Bills, which were held as collateral for our amount outstanding under the Treasury Facility. The Treasury Facility enabled us to comply with certain requirements necessary to qualify as a RIC. We terminated this facility due to our decision to no longer be treated as a RIC.

On February 21, 2008, the Company amended its Investment Facility to reflect its announcement on January 22, 2008 that it would no longer be treated as a RIC under the Code and that it will be taxed as a corporation for the fiscal year ended November 30, 2008 and for future fiscal years. The amendment removed the Company's requirement to maintain its RIC status and modified certain other terms in accordance with the Company's intention to be taxed as a corporation.

On September 19, 2008, the Company amended its credit facility to modify the calculation of its borrowing base. The modification was driven by the Company's stated strategy to increase its portfolio of private MLPs and decrease its holdings of private debt securities. The amendment increased the percent of total borrowing base that comes from private MLPs to 45% from 35%, which has the effect of increasing its borrowing base. In conjunction with this amendment, the Company agreed to limit the single issuer contribution to borrowing base to 10% of the revolving commitment amount of $100 million.

The obligations under the Investment Facility are secured by substantially all of our assets, and are guaranteed, generally, by any of our future subsidiaries. The Investment Facility contains affirmative and reporting covenants and certain financial ratios and restrictive covenants, including: (a) maintaining an asset coverage ratio (excluding collateral and indebtedness under the Treasury Facility) of not less than 2.50:1.0; (b) maintaining minimum liquidity at certain levels of outstanding borrowings; (c) maintaining a minimum of shareholders' equity and (d) other customary restrictive covenants. The Investment Facility also contains customary representations and warranties and events of default. The Investment Facility allows us to supplement our equity capital to continue to make portfolio investments.

Contractual Obligations

Investment Management Agreement. We have entered into an investment management agreement with KAFA under which we have material future rights and commitments. Pursuant to the investment management agreement, KAFA has agreed to serve as our investment adviser and provide on our behalf significant managerial assistance to our portfolio companies to which we are required to provide such assistance. Payments under the investment management agreement may include (1) a base management fee, (2) an incentive fee, and (3) reimbursement of certain expenses. For the three and nine months ended August 31, 2008, we accrued and paid $1.3 million and $4.0 million in base management fees and did not accrue or pay any incentive fees. We did not accrue or pay a management fee or any incentive fee with respect to any investments made under the Treasury Facility, which was terminated on January 31, 2008.

As of August 31, 2008, we did not have, or have not entered into, any long-term debt obligations, long-term liabilities, capital or operating lease obligations or purchase obligations that require minimum payments or any other contractual obligation at the present, within the next five years or beyond other than the borrowings outstanding under our Investment Facility as of August 31, 2008 described above under "Liquidity and Capital Resources."

The following table summarizes our obligations as of August 31, 2008 over the following periods for the Investment Facility.

                                                                  Payments by Period ($ in millions)
                                                          Less Than 1                                            More Than 5
                                           Total             Year             1-3 Years         3-5 Years           Years

Investment Facility(1)                   $    77.5                   -       $       77.5                -                  -

(1) At August 31, 2008, $22.5 million remained available for borrowing under our Investment Facility.

Dividends

We intend to continue to distribute quarterly dividends to our common stockholders. Our quarterly dividends, if any, will continue to be determined by our board of directors. On July 31, 2008, we paid a dividend to our common stockholders of $0.42 per common share (for the period from March 1, 2008 to May 31, 2008), totaling $4.2 million.

On October 2, 2008, we declared our quarterly dividend of $0.42 per common share for the period June 1, 2008 to August 31, 2008 for a total of $4.2 million. The dividend is payable on October 30, 2008 to shareholders of record on October 17, 2008.

Prior to our election to be taxed as a corporation, dividends paid by us were generally taxable to stockholders as capital gains, ordinary income or return of capital. After giving effect to the election, our stockholders will no longer recognize an allocable share of our capital gains or ordinary income. Instead, the component of our dividend that comes from our current or accumulated earnings and profits will be taxable to a stockholder as corporate dividend income. This income will be treated as qualified dividends for Federal income tax purposes at a rate of l5%. The special tax treatment for qualified dividends is scheduled to expire on December 31, 2010. Distributions that exceed our current or accumulated earnings and profits will continue to be treated as a tax-deferred return of capital to the extent of a stockholder's basis. We expect that a significant portion of future dividends to shareholders will constitute a tax-deferred return of capital.

Off-Balance Sheet Arrangements

At August 31, 2008, we did not have any off-balance sheet liabilities or other contractual obligations that are reasonably likely to have a current or future material effect on our financial condition, other than the investment advisory and management agreement with KAFA.

Critical Accounting Policies

The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of our Annual Report on Form 10-K for the fiscal year ended November 30, 2007 sets out a complete description of our critical accounting policies, with respect to which there have been no material changes since the filing of our Form 10-K.